The Long March of State Neoliberalism

Whenever neoliberalism is defined it is invariably equated with the osmosis of the ‘untrammelled free market’ into ever more areas of life.

One of neoliberalism’s intellectual originators – Friedrich Hayek – made the hugely influential claim that people (and by extension their political representatives) could never know enough to plan or intervene in the economy. A person’s knowledge was limited to “their own small circle” and the things which were important to them, which only they knew. Because knowledge was never available to people “in its totality”, attempting to direct the economy in certain ways or favour some economic entities over others was dangerous and inimical to the limited sphere of freedom people truly possessed.

The consequence of these assumptions was that only the free market could guarantee liberty. The only genuine choices people could make were to do with buying and selling because they concerned matters and desires that only they knew about. If markets were left alone and the price mechanism remained unregulated, the economy would achieve ‘equilibrium’ and people would receive what they wanted and were due.

These ideas have played a massive role in constructing the world in which we now live, in areas as diverse as electricity provision, financial services, corporate mergers and takeovers and the housing rental market (to name a few). The job of government was restricted to setting markets up and getting them running. Beyond that the state should get out of the way. It cannot, according to Hayek, know more than markets do. And while individuals within markets can make mistakes, markets as a whole – because they are an agglomeration of individually optimal choices – cannot be wrong.

Thus democracy – which is, in essence, about the ability of people to understand the world and act on their desires – should be heavily constricted. Indeed, we can be sure that had representative government and a universal franchise not already existed, neoliberals would not have invented them and would have opposed any attempts to create them – as their 19^th century forebears in fact did.

This ‘market fundamentalism, as many have noticed, requires a stronger state than the ‘night-watchman’ state of neoliberal yore. The state must not only enforce private property rights but also banish outside interference with markets. In practice, in the US, Britain and elsewhere, this meant destroying the power of the trade unions. Although voluntary, not statutory, organisations, trade unions distorted markets by intruding on their natural operations – by, for instance, insisting people were paid more than they were worth in ‘market terms’. The Conservative party in Britain, which under Thatcher became a truly Hayekian organisation, dutifully destroyed the power of trade unions.

However, the state as an entity never went away, and as the Covid-19 crisis has shown it has proved more important to neoliberalism than few can have imagined.

How low can you go?

The 2008 financial crisis was a major turning point. Not only did governments use their power to bail out banks and corporations – which under the law of the free market should have vanished – they instituted a regime of ultra-low interest rates. At these historically unprecedented levels – never going above 1% – they have two important effects. Firstly, they preserve insolvent, hugely indebted companies by reducing the amount of interest they have to pay on their debts. This is the polar opposite of the approach of the Hayekian Thatcher to manufacturing industry in the Britain in the early 1980s. She hiked interest rates – up to 15-17% – as a way of driving trade union-heavy manufacturing industry to the wall.

Secondly, they make any recovery of the private sector extremely difficult. Just as they make debts more affordable, ultra-low interest rates discourage investment by ensuring the financial return on advanced money is negligible (the tiny official bank rate was reflected in nominal interest rates in the economy as a whole and Quantitative Easing programmes made sure they stayed low). But in these circumstances, private companies naturally eager to make profits had somewhere to turn – the government.

The two phases of privatisation

In this they took advantage of the historic process of privatisation, which aside from the onslaught on trade unions and deregulating the economy, was the main way neoliberalism was implemented. In Britain, the “great divestiture” of privatisation had two distinct phases. In its early years privatisation was about simply transferring ownership of industries from the state to the private sector. In this way, companies like Jaguar, BP, Cable & Wireless, Rolls Royce, British Steel and even Thomas Cook were denationalised and had to sink or swim in the private sector. While some survived, others were taken over, heavily denuded (British Steel) or went bust – as was the fate of Thomas Cook last year.

But privatisation soon became much more ambitious. From the mid-1980s until now, it has been primarily about contracting out monopoly services from the state to the private sector. The (very long) list includes utilities (water, electricity etc.), railways, academy schools, NHS contracts, air traffic control, the Royal Mail, local authority outsourcing and care homes. Very often these services were funded – and continued to be funded – by the government and, most importantly, could not be allowed to cease to exist.

This very conditional privatisation was actually very welcome to the large companies that won the contracts to provide these services. They were anything but free markets zealots and were very glad for a guaranteed profit stream in the context of private sector torpor. As noted by health campaigner Allyson Pollock some years ago in terms of NHS privatisation, “the private health care industry is not interested in a purely private market. Its interests lie in becoming for-profit providers in a basic health system funded out of taxation.” An insight that could be applied across the board of modern privatisation.

Hence, Britain has seen the grown of private companies – such as Serco or Capita – that specialise in delivering public services. Potentially everything in the public sector – GP services, benefit assessments, prisons, school inspections, speed cameras, nuclear laboratories, early warning systems and even the operation of spy planes – was open to being run by the private sector on a contract basis.

The hollowing out of the state in the name of putative private sector efficiency and ‘sound management’ (ho, ho) has occurred across the world. A 2004 profile of Lockheed Martin in the New York Times noted:

Lockheed Martin doesn’t run the United States. But it does help run a breathtakingly big part of it. Over the last decade, Lockheed, the nation's largest military contractor, has built a formidable information-technology empire that now stretches from the Pentagon to the post office. It sorts your mail and totals your taxes. It cuts Social Security checks and counts the United States census. It runs space flights and monitors air traffic.

In one sense, this was – from the point of view of neoliberals – a welcome development that flowed naturally from the thinking of pioneers like Hayek: the state was creating and protecting markets. But in other ways, it had unforeseen consequences. Large oligopolies hoovered up contracts – far from competition letting a thousand flowers bloom, three or four companies – at most – reigned supreme. Competition, in the idealised vision of Hayek, meant “decentralised planning by separate persons”, but in no sense can the actually existing privatised state be described as decentralised or involving people, as opposed to large corporate entities. Only big companies had the resources to bid for government contracts and public sector monopolies – the object of neoliberals’ enduring enmity – became private sector oligopolies.

Secondly, democracy or government – the very thing neoliberals wanted to restrict and limit in its ambitions – was essential to the whole process of privatisation. Closeness to government was essential to winning contracts and a revolving door between the private sector and elected institutions and the civil service span permanently. This was an open door for corruption and a distortion of democracy but it was of no interest to neoliberals who were unconcerned about the distortion of something they didn’t like in the first place.

They were however concerned about the private sector and this became, thanks for the ultra-low interest rate regime, equally distorted. It is not a widely known fact the Austrian school of free market economics (of which Hayek and fellow neoliberal, Ludwig Mises, were the most prestigious members) was intensely distrustful of low interests rates because it holds them responsible for causing economic slumps (see the musings of former Tory and UKIP MP Douglas Carswell for a 21^st century version).

But although low interest rates potentially increase the amount of money circulating in the economy and make life easier for insolvent companies by reducing the interest of their debt, they make it difficult to make a profit on investments because the returns on offer are so low. The alternative is either to go for riskier private sector investments or to seek the security of government contracts which often offer double digit returns.

Since the financial crisis interest rates in Britain have never gone above a half of one per cent and, since the coronavirus lockdown, have been cut further – to 0.1%. This situation – in conjunction with the Hayekian ideology of successive Conservative governments – goes a long way to explaining the incompetence of the public response to the virus.

Useless and lethal

What was demanded was a smooth and joined up public health response, involving local councils, that prioritised above all else the needs of health workers and patients. What actually happened was a labyrinthine mess of competitive tendering and outsourcing which awarded contracts to large companies, like Deloitte and Serco that had no expertise in what they were supposed to do. The result, apart from “cementing the position of the private sector in the NHS supply chain”, has been a test and trace system that won’t be “fully operational” until September and a “useless” system of delivering PPE to NHS staff. The deaths of hundreds of NHS and care workers from the virus, many of them avoidable with proper PPE, as well as the highest excess death rate in Europe – in part the consequence of inadequate or non-existent PPE allowing the virus to spread in hospitals – cannot be divorced from this farrago.

But this is likely to merely be a trial run for what is in store. Against the backdrop of a huge fall in GDP of over 20%, the worst projected economic downturn of all major economies and mounting unemployment, the government will almost certainly proclaim a jettisoning of ‘ideological presumptions’ and commit to an interventionist, state-driven economic policy. A ‘green industrial revolution’ will be announced, aiming to create jobs and reskill millions of people.

Such a policy might even appear ‘socialist’ – a green industrial revolution was obviously the centrepiece of Labour’s offer at the last election – but the Conservative version will be careful to offer private companies profit-making opportunities at every stage of the process. It will be a like a souped-up version of the Work Programme. This can already be seen in the free school meal voucher scheme – the one extended over the summer holidays after the campaign by Marcus Rashford. A corporation – Edenred – is in charge of the scheme, not local councils. Astonishingly, the same company has been accused of “woeful” preparation and failing to send out vouchers to hundreds of thousands of parents who need them.

Facile comparison

This is why equating the current actions of the Conservatives in Britain with the policies of Corbyn’s Labour at the 2019 election is facile. The superficial resemblances – increased public spending, train nationalisation, a green industrial revolution – betray fundamentally antagonistic philosophies.

This is not a question of one being enthusiastically statist and other reluctantly so. It is matter of the Conservatives being committed to constructing a statist shell underneath which a privatised bevy of oligopolistic corporations running contracted out services are permitted to make a level of profits which the fêted free market can no longer provide. Some ‘Corbynite’ policies, such as a ‘national care service’ and ensuring 100% high speed broadband, would, it is true, have supplied a statist stimulus to the private sector. But others such as renationalising the NHS and utilities like water and electricity would have repealed the decades-long neoliberal hollowing out of the state.

But this, as we know, will not happen. Instead state neoliberalism, its intellectual roots now long forgotten, will continue its long march.

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The Undrowned World

It is predicted that, because of the coronavirus pandemic, 2020 will be the first year since the Second World War that global GDP falls. Output in so-called ‘emerging markets’ is forecast to drop by 1.5%, the first decline since records began in 1951. Two billion people – a quarter of the world’s population – are living under lockdown of some kind. According to the former chief economist of the IMF, global trade and commodity prices are experiencing a 1930s-style collapse.

In ‘developed’ economies the picture is no different. There are 33 million unemployed people in the US, over a fifth of the workforce. The European Union is undergoing a more severe economic contraction that the US, “the deepest economic recession in its history” according to the European Commissioner for the economy. While Britain faces the worst economic recession for over three centuries.

And yet despite an economic downturn of unparalleled dimensions, the world is only just about on course to deliver the carbon emission reductions necessary to keep within 1.5 degrees of warming, the level identified by the IPPC as the ceiling above which massive crop failures, inundation of cities, huge refugee flows etc. become inevitable.

Carbon emissions, forecasts the International Energy Agency, are set to drop by just under 8% in 2020 (they were flat in 2019).This will be the largest ever fall in CO₂ emissions. By a fortuitous coincidence, according to the UK website, Carbon Brief:

Global emissions would need to fall by some 7.6% every year this decade – nearly 2,800MtCO2 in 2020 – in order to limit warming to less than 1.5C above pre-industrial temperatures

But this benevolent trajectory won’t last. Even if Boris Johnson’s reckless breaching of the lockdown is not imitated by other countries the lockdown will end, this year or next. Most people will eventually return to work even if many others won’t have jobs to go to and depression conditions – long-term low growth – ensue.

Lockdown cannot go on forever. It is true that economic recession need not – in fact often doesn’t – lead to higher mortality and suffering (recession followed by austerity does, however). Indeed, evidence suggests that people in Britain are welcoming the changes, such as cleaner air, that lockdown has produced. But the palpable benefits it produces – through the suspension of economic activity – indicates that this is not a normal economic crisis.

Invariably, in economic downturns, economic activity continues at a reduced level or the government steps into the breach, as it did in Great Depression America, and creates paid work. But in the coronavirus slump, whole economic sectors have been stopped in their tracks.  As Marxist economist, Michael Roberts, notes, this is not something that can continue in perpetuity, with governments – ideally – supplying the cash transfers to make sure no-one is destitute. In the absence of productive economic activity, governments cannot continue indefinitely inventing money based on debt – jobs will disappear and hyper-inflation will take hold.

In other words, the sustainable path the world has – quite by accident – found itself on, is not sustainable.

This is not an argument for scaling back the lockdown before it is safe to do so as is happening in the UK. Evidence from New York indicates that maybe a fifth of people have had the virus but herd immunity – the point at which the virus stops being transmitted – requires 60-70% of the population to have been exposed. Sending people back to work before that has occurred, or a vaccine developed, clearly risks many more people dying.

But it is an argument for acknowledging something. The fixation on economic growth that has, quite justifiably, been criticised as a form of insanity, masks something equally disturbing, and intractable – the dependence of the vast majority of people on that economic growth. Without it, under this economic system, jobs and livelihoods vanish.

This is quite apparent by looking at the UK, where over 16 million people have less than £100 in savings, but it is even more glaringly obvious by examining a country like India. In the country which was formerly the world’s fastest growing major economy, 90% of the workforce are thought to making a living in the ‘informal’ sector. Working as rickshaw pullers, baggage collectors and street vendors, amongst other occupations, these people are “daily wage earners” – if they don’t work, very soon they – and their families – don’t eat.

In the current circumstances, the need for direct cash transfers so people can survive – in India and the UK – is obvious. Indeed, basic income is not something exclusively for the developed world. Finland may have recently concluded that basic income improves mental and financial well-being, but the same was already true for India. A basic income pilot in the state of Madhya Pradesh between 2010 and 2013 reduced debt bondage and increased the confidence of the recipients.

But the world economy now confronts a quandary. In order to head off the most catastrophic effects of climate change, curtailment of economic activity – in addition to re-sourcing and clean technology – is necessary. The inadvertent coronavirus slump shows how radical it needs to be. But an indefinite lockdown – not even considering the restrictions on personal liberty – will have equally catastrophic economic effects, even if (a very big ‘if’ admittedly) people are supported through it by government spending.

Put simply, it is not possible to build a sustainable and equal society on top of an inactive capitalist economy. Something has to give. And building a just society on top of capitalism, albeit active capitalism, has been the default position of many supporters of basic income and modern monetary theorists.

Ultimately this is an argument for imagining what a ‘rational’ economy would look like. What would the contours of a post-capitalist economy be? How would it ensure that the dependence people have on economic growth taking place, and capitalism functioning well, is relieved so that the economy becomes genuinely sustainable? In dismantling the machine of capitalism, how would the social calamities of hyper-inflation and destitution be averted and how would public services be funded?

Those Recession Blues

Don’t panic! A conspicuous feature of mainstream accounts of recent stock market torments is that beneath the systematic shredding of share values everything is fine. Both UK and global equities have lost approximately 9% of their value since the start of 2016 and around 20% since April last year. Nonetheless, financial experts have been on hand to point out that the real economy has not suffered from this ‘equity bloodbath’, and is not likely to.

The sage and sceptical voice of the Telegraph’s Ambrose Evans-Pritchard, despite other downbeat pronouncements, advises a cool view be taken of ‘these deranged markets’. ‘This a stock market rout we should celebrate’, he says. The New Statesman’s Go To finance analyst, Felix Martin, maintains that the ‘global economy is in reasonable shape’. Only its software, the financial system, is faulty and ‘can be debugged’.

I think we should not be taken in by these soothing utterances. There are reasons to be worried. Which become more apparent, when you consider, in depth, the reasons frequently given for why we shouldn’t be:

Stock crashes don’t always affect the real economy

This is true, historically speaking, but the reasons why it was so in the past don’t apply now. The most notable example of a stock market crash not translating into a recession or depression was 1987. Then, the US stock market lost nearly 29% of its value in three days. But a downturn did not materialise (although there was, many argue, a delayed recession from 1990-92). The reason for this was the instantaneous reaction of the US Federal Reserve under new Chairman Alan Greenspan. Interest rates were cut and $12 billion injected into the banks.

Another stock market crash in 2001, the bursting of the dot com bubble, prompted a similar response. After successive rises at the height of the boom, Interest rates were again cut - to 1% in the US and to 4% in the UK. An immediate slump was sidestepped but the seeds of the Great Recession were planted in these actions. Banks, corporations and consumers took advantage of the low rates to borrow like crazy and when interest rates were subsequently raised, the housing market folded.

The official response to the Great Recession, in addition to massive bail-outs and subsequent doses of Quantitative Easing, was to again drop interest rates – to historic lows. Last December, the US Federal Reserve edged them higher and then came to regret the decision as stock markets haemorrhaged value. In fact, they have headed in a resolutely southwards direction, even since the Federal Reserve ended its 6 year $4.5 trillion invented money, Quantitative Easing programme, in late 2014.

Thus, central banks are in an impossible situation. The traditional response to a stock market crash – slashing interest rates – is not an option if they are near zero to begin with. And increasing them to secure the breathing space to drop them again only seems to instigate the very crash you want to avoid.

This is why William White, chairman of the OECD’s review committee, said recently, “Things are so bad that there is no right answer. If they raise rates, it’ll be nasty. If they don’t raise rates, it just makes matters worse.”

This quandary is what people mean when they say central banks have no ‘ammo’ left to fight a crash. And if, in contrast to the recent past, they are bereft of weapons, then a stock market crash will inevitably infect the rest of the economy.

The global economy is not ripe for a fall

Alright, say the recession sceptics, the world economy may not be hitting the high spots of the turn of the century, but it is chugging along nicely. The ‘macro picture’ belies nothing to be concerned about. Evans-Pritchard says world economic growth has been ‘drearily stable’ for years – 3.4% in 2012, 3.3% in 2013, 3.4% in 2014, 3.1% in 2015 and forecast to be 3.4% again this year.

Moreover, the drop in oil and commodity prices, while hitting commodity producing countries and companies, (Japan, Canada, Australia, Russia, Ukraine, Brazil and Greece all experienced recessions in 2015) has been a massive shot in the arm to consumers, akin to a large tax cut. Coupled with near zero inflation, consumers are recovering from the gaping wound to their living standards inflicted after 2008. Consumer spending amounts to up to 70% of GDP in the UK and US, so, the logic goes, when consumers prosper, so do economies.

The flaw here is that there is no real evidence that falling consumer spending or faltering economic growth precipitates stock market crashes or recessions. Or that rising consuming spending is an inoculation against them. Economic growth was respectable (and much better than now), in the run-up to the 2008 crash. But the crash still happened. Research has shown a negative correlation between economic growth and consumer spending in the US. When economic growth was higher in the 1950s and ‘60s, consumer spending occupied a lower share of GDP. Conversely, 2001-10 was a decade of relatively high consumer spending, but low economic growth. The key to economic growth seems to be the level of business investment**.

Declining consumer spending is thus a consequence of recession or stock market crashes, not its cause. One variant of Marxism argues, persuasively in my view, that the crucial element is the overall profit of companies. This profit level should not be confused with profit margins* (the percentage of profit compared to total sales), which can be increased by bearing down on ‘costs’ such as wages, and are currently very healthy. By contrast, overall profit levels are, it is claimed, near post-1945 lows for US corporations, and will, in time, lead to lower business investment. Earlier this month, economists at the mega-bank JP Morgan warned of a 10% fall in corporate profits compared to a year ago. “A double digit decline in profits is a rare event outside of recessions, having been recorded only twice in the last half century,” they say.

In other ways, too, the global economy is labouring under lowering clouds. Debt levels are huge, having grown by £37 trillion since 2007. Debt has doubled in emerging markets while increasing by around a third in developed economies. And this is after the last crash, which was transformed from a bearable ‘v shaped’ recession, into a global credit crunch by huge levels of private debt.

Overall corporate leverage (debt) is at a 12 year high. It stands at $29 trillion in the US and, it is estimated, one third of companies globally are not generating high enough returns to cover their funding. European banks are especially vulnerable, think of Deutsche Bank’s recent losses and credit risks, and may have to be recapitalised ‘on a scale yet unimagined’, says the former chief economist of the Bank for International Settlements. Taking on debt to buy back shares and thus bolster the share price and apparent health of the company, has become a major activity for large US corporations over the past five years. In the words of one financial strategist, “this is not for real economic activity.”

So the major actors in the global economy, the multinational corporations, whose health will determine whether stock markets crash and economies dive into recession, are not in reasonable shape.

You can continually dodge the recession bullet

Underlying all these predictions that the global economy can weather stock market storms is a fantasy – that recession can forever be averted provided the economic fundamentals are sound enough. Before the 2008 crash, similar siren voices were insisting there was nothing to be concerned about.

But history paints a more realistic picture. Two Russian researchers, Korotayev and Tsirel have calculated that there have been six recessions since 1973. This is using the IMF’s definition of a recession – six months where global growth dips below 3%. Using the accepted developed economy recession definition, two successive quarters of contraction, there were recessions in 1974/75, 1980/81, 1990/92 and 2008/9. As opposed to none from the end of the Second World War until the mid-seventies. So, if recent history is any guide, the question is not if, but when.

‘What happens when’ is the crucial question. Because the recession that awaits us is not an ordinary one. By ordinary, I mean a V-shaped downturn during which growths dips below zero and then swiftly recovers. The 2008 slump was not ordinary. It was so prolonged, sweeping and deep because it was accompanied by massive debt contraction on the part of over-leveraged banks and corporations. The signature products of the crash – credit default swaps and collatarized debt obligations - betray exactly what was going on.

Nothing in the official reaction to the 2008 crash, the lowering of interest rates and propping up markets with masses of confected money (QE), has done anything to deal with these underlying causes. It’s why one economist has condemned the worldwide governmental response as “self-contradictory and doomed to failure”.

Thus, the next recession is likely follow a similar course to the last, with the exception that governments have exhausted their ammunition to combat the contagion.

“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” said William White, chairman of the OECD’s review committee last month. “It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.”

The critical assumption here is the inevitability of the next recession and what will follow its in wake. Then we will see if governments really are bereft of ammunition or can conjure yet more monetary tricks to kick the can further down the road. If they can’t, the consequences will be profound.

 *As far as I understand, it is quite possible for a business to increase its profit margins (by cracking down on wages, utilising zero hour contracts or slashing the marketing budget) but reduce its overall profit. Conversely a business can increase profit levels by expanding (taking on more staff, moving to bigger premises etc) yet reduce profit margins. But the long-term aim would be to increase profit and, in time, profit margins. Since 2008, many companies have followed, not the traditional maxim of ‘grow or die’, but rather ‘sweat or die’.

** If this is true, it is a damning indictment of a major plank of public policy over the last 40 years – slashing corporate taxation as a way, it is claimed, of giving businesses more money to invest and thus create jobs. An approach known as supply side economics. Actually business investment as a share of GDP has fallen in most developed countries since 1980. A period when recessions have become much more common.